Founder’s Corner – The Three Leg Stool of Long Term Balance

Part of Bob’s continued ramblings. This one is about how we are trying to keep a balance to our company and how this impacts year end decisions coming in 2023 and our plan for 2024.

We are beginning our planning process for 2024 and there are several interrelated thoughts that are helping to guide this plan, along with reflections on our history that I thought it would be interesting to write about.

The good news is that we are back to profitability, and the challenge is to assure that we continue to have a long term profitable and growing company to keep our three constituencies happy and motivated to continue progressing the company for the benefit of all.

Three Leg Stool

This is the concept where there has to be a balance between customers, employees and owners. This is that third circle in our Guiding Principles. We have set the company up in a way that strives to achieve that balance.

Customers – Being a Product Led company, we are constantly putting out great technology for our customers and bias our spending much more to software development than sales and marketing. We also price fairly (especially in contrast to Eventbrite!), and provide a huge number of free services like free email, free websites, free photos, free txt messaging for results and emergencies, free for free events, free volunteer system, etc.

EmployeesWe strive to pay employees well, with good benefits and emphasizing longer term things like healthcare, 401K and HSA contributions the company makes. I will get into compensation more below as part of the planning process, but we do Profit Sharing with employees and all employees get options in the company (I’ll talk more about that later as well).

Owners – This is another blog I should write, but the short version is that owners need to see a return either thru the sale of the company at a higher price than they paid, or via a flow of dividends (and even the sale price of the company gets back to the idea of cash flow of dividends in the long term). The other short version is that ownership is split between myself and my family, our employees and our outside investors. There is no potential sale of the company in the foreseeable future and we are at the point where some of the profits can be distributed to shareholders. Again, more on this later.

Of course, all three constituencies want progress. Customers want more features to help them grow and manage their events. Employees want to grow their careers, learn and make more money. And owners want to see a return on their investment and for that return to grow over time.

Profitable Company

When we started the company, we felt we could use technology to build a good product that customers would want and be able to run the company efficiently enough to generate a profit. From 2010 to 2014 we were unprofitable, but this was due to the rapid growth we were experiencing as a small company and our decision to continue to invest in growth vs. profitability because future profits would be larger.

By 2015 we had hit the scale of business where we were developing a leadership product in the endurance space and were profitable. Of course we ran into a problem at that time that caused us to be “distracted” until 2018.

By 2019 we were back on track and becoming profitable and thinking about growth beyond endurance when we hatched the idea of GiveSignup and a ticket platform for nonprofits. Of course, the pandemic hit us hard. We recovered and received outside funding to try to make a go of the nonprofit space with GiveSignup. Unfortunately, GiveSignup did not grow fast enough to justify the additional spending we were taking on, and we continued to be unprofitable in 2021.

By 2022, our endurance business was coming back, especially the second half of the year after Omicron faded. Our customers were getting more participants and we had picked up market share. We had introduced our ticket product as TicketSignup, and pivoted GiveSignup to be focused on P2P events. We were marginally profitable in 2022.

2023 has been a very solid year – kind of what we had originally envisioned with strong products for customers, great employees and being very efficient generating a decent profit.

2023 Profit Distribution

Great news – we are going to make a profit in 2023. Now, what do we do with that? Here are the areas we will distribute that profit and how we think about each:

Taxes – We need to pay taxes. US corporate taxes are about 20%. However, with the 2017 R&D tax going into effect in 2022, this makes our IRS reported profit a LOT more than it really is. We spend about $5 Million a year on R&D, and now have to capitalize that. Which means we can only claim expense for 10% of that in 2022 (30% in 2023 and increasing 20% each year until near 100%). So this year we will owe an additional 20% * $3.5M = $700K. So US taxes will be high. We also pay taxes in 25 states, with our home office in NJ, so we will also pay considerable state taxes.

Working Capital – Companies need “working capital” to keep operating. For example, lasting thru lower business seasons like the summer and winter so we can continue to pay our employees and other bills. As a company grows, expenses grow and there is a larger and larger need for working capital, so we need to allocate some of the profit to stay on our balance sheet and in the bank (or Vanguard Money Market Fund).

These first two items are not questionable in terms of what we need to do. The next two are variable and there are decisions that need to be made, and philosophies to guide them that try to ensure we stay true to the three leg stool philosophy.

Employee Bonus Pool – When we started the company, I wanted to have a connection between company performance and compensation. If employees worked hard and made the company successful, then they should share in the success. Even though most of our years have been unprofitable, we still made a decision to distribute bonuses. The justification was that we knew that we would become profitable at some point if we had high quality, highly motivated employees. This was an investment that the owners of the company made by putting capital (money) into the company. Now that we have become profitable, we are basing the bonus on a combination of:

  • Level of contribution of each person (both role and performance)
  • Performance of company relative to plan
  • Profitability of the company

Now that we are a profitable company, the total bonus pool will be increasingly determined by the profit of the company. Hence the larger the company profit (and more efficient – $Profit/Employee), the larger the pool.

Dividends – We also need to have a way to reward investors for their contributions to the company. In our case, outside investors hold less than 10% of the company, so dividends get mostly distributed to stockholders. Today, that is mostly myself and a few employees who have converted their stock options to shares. All employees have options to purchase the stock, however we do not have enough track record yet for most employees to make that bet of buying the shares and receiving dividends. We hope that over the next couple of years we can hit a level of consistency where dividends are more widely distributed to employees so that they can share as owners.

2024 Planning

As we put our plan together for 2024, the familiar thought of a virtuous cycle comes into play again.

One of the things that becomes obvious is a need to grow our revenue. We know that employees need raises to reward them for advancing their careers and how much they are contributing to the company as well as offset inflation. We also know that we would like to have enough profit to try to expand dividends so they get to the level that they help reward employees via their stock option conversion to shares.

We know that to grow our revenue, we need to make our existing customers happy by continually improving our product and offering excellent service. We also need new customers and expand revenue from existing customers (using TicketSignup instead of Eventbrite for their ticketed events!). As we have discussed in our Q2 update, we have an exciting product plan.

We expect our various product lines (RunSignup, GiveSignup and TicketSignup) to grow at different rates. We look at trends and analyze customer churn and new customer acquisition to help us estimate growth. We also try to estimate the impact of major new releases like next gen tickets for recurring events and next gen membership system. However, we know it takes time for customers to learn about and absorb the advantages we can bring to them. Due to our market size (40%+) in endurance, growth is somewhat limited as there are fewer and fewer customers to move to our platform. Our Ticket business will grow very fast, but it still relatively small so has a smaller impact on overall growth.

Over the next few months, we will wrestle with the various “dials” of growth, cash flow and profitability to put together a plan that keeps us stable and a solid vendor for our customers, employer for our people and investment for our owners. It is a challenging and fun puzzle – made easier because of our great customers, employees and investors. Hopefully we make the right decisions and keep the balance.

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